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Welcome to the EPAC Corner! We are pleased to bring you this content from the Estate Planning Advisory Committee (EPAC) of the DeKalb County Community Foundation. If you have any questions about the information below or the EPAC group, please contact Community Foundation Executive Director Dan Templin at 815-748-5383 or firstname.lastname@example.org.
The EPAC Corner content aims to provide general information about estate planning and charitable giving. We hope it’s helpful and informative. Please know that we welcome suggestions for monthly content topics. We’d love to hear from you.
Five Frequently Asked Questions About Trusts
1.) What is a trust?
A trust is a formal, legal arrangement for the continuing care and management of property. This legal arrangement is established by will, deed, agreement, declaration, or other written instrument. Most notably, a trust is not a legal entity, such as a corporation or limited liability company. Instead, a trust’s existence arises from the agreement between the settlor (who establishes the trust), the trustee (who manages the trust), and the beneficiary (who benefits from the trust).
2.) Can I establish a trust for myself?
Yes. This is common and refers to as a revocable trust, a living trust, a declaration of trust, or an inter-vivos trust. In a typical revocable trust, the settlor would transfer assets to herself as trustee. The settlor/trustee would then manage the assets to benefit herself while alive. If the settlor/trustee becomes disabled, then a successor trustee would assume responsibility for managing those assets and continue to use the assets to benefit the disabled settlor. Finally, upon the settlor’s death, the trust directs the distribution of the trust assets.
3.) What is the best age for setting up a trust?
The decision to set up a trust should be based on the intended purpose and the need for such an arrangement, not on the person’s age. Any person over the age of 18 may establish a trust. There are certain circumstances where trust-based planning is highly recommended, as follows:
- Your family’s net worth is approaching or exceeds $4 million, including life insurance, and you live in Illinois.
- You own real estate in more than one state.
- Your estate plan includes complicated or controversial provisions, such as a disinherited or special needs child.
In most situations, trust-based planning has benefits and costs that must be weighed when choosing the appropriate estate plan.
4.) Does a trust pay income taxes?
An entire Subchapter – J – of the Internal Revenue Code is dedicated to the taxation of trusts. The Internal Revenue Code entirely ignores some trusts. For example, a revocable trust reports its income on the settlor’s personal income tax return “Form 1040” in most circumstances. Other trusts file and pay income taxes on the income generated by their investments. As a general rule, however, it is essential to note that trust income is always subject to tax, but it is only taxed once – either to the trust, the grantor of the trust, or a trust beneficiary. Evaluating the potential income tax consequences of trust-based estate planning is critical.
5.) Can I change my mind after I create a trust?
The vast majority of trusts used for estate planning are revocable, meaning they can be amended or revoked at any time. Most commonly, a trust will be restated occasionally, a complete amendment from the first to the last page. This avoids the need to replace individual paragraphs in the trust to reflect changes in the law or the settlor’s goals for the trust. There are very specialized trusts that are irrevocable upon formation. Significant tax, creditor, and accounting consequences accompany the creation of an irrevocable trust.
Benefits of a Trust
The primary benefits of trust-based planning are:
- Protection in the event of incapacity
- Probate avoidance – Review the October 2023 issue >
- Financial privacy
Trusts are one tool used in a well-planned estate. There is, however, no one-size-fits-all estate plan. There is also no substitute for personalized advice regarding estate planning. If you are beginning the process, the DeKalb County Community Foundation can provide you with referrals to the members of the Estate Planning Advisory Committee, who can develop a customized plan to meet your goals.
– Matthew L. Brown, local attorney and member of the DeKalb County Estate Planning Advisory Committee
Established in 2020, the DeKalb County Estate Planning Advisory Committee (EPAC) comprises of local professionals providing estate planning services, including attorneys, trust officers, CPAs, wealth advisors, and insurance agents. The purpose of the EPAC is to raise awareness and understanding of the Community Foundation as a resource for professional advisors and their clients, assist with efforts to deliver effective estate planning education to the general public and notify estate planning professionals on topics relevant to the intersection of estate planning and philanthropy.
Matthew L. Brown